VCs Get A Taste Of Their Own Medicine From Investment Bankers

from the tough-to-feel-sorry-for-them dept

I imagine just about any entrepreneur who's struggled with venture capitalists over some of the more onerous terms found on the term sheets they receive will read this Red Herring article and laugh (somewhat bitterly, perhaps). It seems those poor, poor VCs who have been sticking entrepreneurs with crazy liquidation preferences and other things that often take most of the incentive away from entrepreneurs are now complaining themselves about the terms that investment bankers are putting on IPO deals. In particular, they're upset about lockups -- which are perfectly standard for employees who own stock. However, many VCs who understand the nature of bubbles want to be able to cut and run at the IPO. To be fair (yes, before you VCs complain), VCs who use these methods will often defend them as reasonable -- and there are defenses of these practices that make some sense. However, the same is true for bankers and the lockups they put on VCs. So, really, it's just VCs getting a taste of their own medicine -- something some entrepreneurs may feel VCs don't get often enough.

CEOs who start companies get less cash but more options than those who join the company later.March 30, 2005

Chief executives who join established companies earn more cash than CEOs who started the companies, according to a survey published Wednesday. But the founders get about 77 percent more equity, usually in the form of stock options.

Which executives earn more in the long run depends on the long-term success of the company.

The report surveyed some 600 top executives at venture-backed companies and found non-founder CEOs made a median salary of $252,000 as compared to just $200,000 for founders. The survey does not distinguish mature companies from younger companies that may not be able to afford an outside CEO.

VentureOne, which conducted the survey, said cash compensation has not substantially changed for two years. ďThe stability of CEO salaries for the past year is not surprising given the stability of the venture-capital market as a whole,Ē said John Gabbert, VentureOneís vice president of research.

Although CEOs get more cash, founders get a bigger stake in the company. The median for founder-CEOs was an 8.7 percent share, while non-founder CEOs got 4.9 percent.

The compensation numbers in the survey underlie what every VC and high-tech entrepreneur knows: stock options are important. The survey comes on the heels of U.S. Securities and Exchange Committee guidelines for expensing those stock options, set out late Tuesday.

The SEC released a 64-page set of rules for interpreting the Financial Accounting Standards Boardís plan to mandate the expensing of stock options. The SECís interpretation gives leeway to corporations in how they account for the value of those options.

Because options are a gamble on the value of a stock at some point in the future, it is impossible to know their value at any given point.

A formula for determining options value won Robert Merton and Myron Scholes the Nobel Prize in Economics in 1997 for the work they did with Fischer Black in 1973 to develop the Black-Scholes model of options pricing. But even that groundbreaking work is predicated on educated guesses about the volatility of the underlying stock and expectations about the interest rate.

Silicon Valley companies have lobbied hard against the expensing of options. Many firms have relied on the promise of future stock options to keep their burn rates low as they grow. In July, the U.S. House of Representatives voted to override FASBís decision to require stock option expensing, but the bill stalled in the Senate.

The SECís guidelines will give companies wiggle room in determining the least expensive way of putting stock option grants on their balance sheets and income statements.

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Thanks for the link, Mike. I should have mentioned something about what happens to the entrepreneurs in this equation. I wrote on the subject in March (see below).Thanks,Alex HaislipRed Herring Magazinehttp://www.redherring.com/Article.aspx?a=11635Company founders get less payCEOs who start companies get less cash but more options than those who join the company later.March 30, 2005Chief executives who join established companies earn more cash than CEOs who started the companies, according to a survey published Wednesday. But the founders get about 77 percent more equity, usually in the form of stock options.Which executives earn more in the long run depends on the long-term success of the company.The report surveyed some 600 top executives at venture-backed companies and found non-founder CEOs made a median salary of $252,000 as compared to just $200,000 for founders. The survey does not distinguish mature companies from younger companies that may not be able to afford an outside CEO.VentureOne, which conducted the survey, said cash compensation has not substantially changed for two years. ďThe stability of CEO salaries for the past year is not surprising given the stability of the venture-capital market as a whole,Ē said John Gabbert, VentureOneís vice president of research.Although CEOs get more cash, founders get a bigger stake in the company. The median for founder-CEOs was an 8.7 percent share, while non-founder CEOs got 4.9 percent.The compensation numbers in the survey underlie what every VC and high-tech entrepreneur knows: stock options are important. The survey comes on the heels of U.S. Securities and Exchange Committee guidelines for expensing those stock options, set out late Tuesday.The SEC released a 64-page set of rules for interpreting the Financial Accounting Standards Boardís plan to mandate the expensing of stock options. The SECís interpretation gives leeway to corporations in how they account for the value of those options.Because options are a gamble on the value of a stock at some point in the future, it is impossible to know their value at any given point. A formula for determining options value won Robert Merton and Myron Scholes the Nobel Prize in Economics in 1997 for the work they did with Fischer Black in 1973 to develop the Black-Scholes model of options pricing. But even that groundbreaking work is predicated on educated guesses about the volatility of the underlying stock and expectations about the interest rate.Silicon Valley companies have lobbied hard against the expensing of options. Many firms have relied on the promise of future stock options to keep their burn rates low as they grow. In July, the U.S. House of Representatives voted to override FASBís decision to require stock option expensing, but the bill stalled in the Senate.

The SECís guidelines will give companies wiggle room in determining the least expensive way of putting stock option grants on their balance sheets and income statements.